CHUCK ROGÉR: WHY WORRY OVER THE ‘TRADE DEFICIT’?
You hear it all the time. We're getting killed by China! We need to stop shipping jobs overseas.
Neither complaint holds water when viewed against global trade's economic effects on America. Working off an inventory of topics which I've been collecting, I reach back to a September 2010 post by Cato Institute's Daniel Griswold for an analysis that remains as hot a topic today as it was four months ago.
Griswold points out that anybody concerned about the trade deficit "should get their heads out of the theoretical clouds and look at what really goes on in the economy."
Facts can reveal wonderful things, if objectively examined. Real-world data tell us that rising imports and an accelerating "trade gap" strongly indicate an improving economy. For the "national interest" jingoists out there, here's something to think about. More than 50% of what America imports is used to satisfy demand for products made in America.
Griswold writes:
In the long run, imports spur growth by forcing domestic producers to be more efficient and productive. Like competition generally, imports weed out the less-productive domestic producers, leaving the market to more-competitive U.S. companies. Those companies are better able to expand their share in global markets and create sustainable jobs with higher pay.
Sub-par companies cry to the Washington nanny for "trade protection." This is similar to when the real world deals out trouble to kids, who then look to mom and dad.
Focusing on the trade deficit is narrow-minded at best. A great deal of the money made by foreign producers that sell in the U.S. comes right back into the U.S. to purchase products, services, property, or non-material market investments. This is not a bad thing. Never has been a bad thing.
Fears about America being increasingly "owned by China" are unwarranted. How many businesses actually owned by the Chinese does the average American deal with? How many people who actually work for foreign bosses does the average American know? How many growing U.S. businesses are "sending profits to China?" Honest answers to all three questions would point up the absurdity of the portrait painted by people who complain about the "trade gap."
Griswold makes a convincing argument against viewing growth in imports as a bad sign.
If the Keynesian worry about imports were justified, we should expect to see a negative correlation over time between the growth in imports and the growth of GDP. Rising imports would tend to be associated with weaker growth, and more slowly growing or falling imports with stronger growth.
And here's Griswold's rationale.
In reality, rising imports are one of the surest indicators of stronger economic growth. After examining quarterly economic data from the U.S. Bureau of Economic Analysis going back to 1980, I found a strong positive correlation between the change in real imports to the United States and the change in real gross domestic product (GDP). Compared with a perfectly proportional correlation of 100 percent, the correlation between imports and GDP is a strongly positive 62 percent.
Politicians myopically focus on exports, but the correlation between rising exports and rising GDP is actually weaker, at 45 percent, than the connection between imports and GDP.
Jingoists push the notion that America must grow exports faster than imports. These preachers preach that importing more than we export is somehow bad. But mathematics doesn't lie. Look again at those last two paragraphs. There's a 38% higher correlation between imports and GDP than there is between exports and GDP. The math says this: Go ahead and focus on growing your exports, but when you do, your economy will grow less than if you had let the market run free to produce increased demand which spurs imports. A rising gross domestic product goes along with rising imports--plain and simple. Trade deficit worriers may reject that reality, but reality it is.
In summary, when imports increase, the economy and the job market expand. When imports decrease, the economy goes into recession and employment falls. There is no similarly strong correlation in the case of exports.
So trade deficit worriers can keep on complaining. But meanwhile, the rest of us can watch over the next few years as the economy expands once again and imports rise faster than exports. Then the worriers can ask themselves what all their worrying was about... anyhow.
Click HERE to receive all posts by email FREE
© 2011 Chuck Rogér